Q.2. What are the reasons for buyback of shares? Which companies have done buyback recently.BUY BACK OF SHARES
Buy back of shares means re-purchases by a company of its own shares. The company maydo so either for reducing share capital or for treasury operations. The reduction in sharecapital implies extinguishing of shares, which have been brought back by the company.Under the treasury operations, the acquired stock can be issued at a later date or for employees option.
Reasons for buyback of shares
To return surplus cash to the investors:
Eventhough the share repurchases anddividends are close substitutes in many respects, this share repurchases are not expected tobe replaced on a regular basis. The share buy backs have a clear advantage for thecompany over cash dividends. Cash dividend attracts dividend tax, while the investmentescape a tax liability. Thus the companies prefer buy back in order to minimise their tax outgo.ii)
To increase the share value:
The process of buying back and extinguishing the sharesby a company brings about a decrease in equity and consequently, leads to an increase inthe earnings per share (EPS) of the company. It is presumed that the market price of thescrip will rise proportionately to maintain the price to the earning (P/E) ratio at the pre-buyback level. A share buy back may also be announced to support share price during periodsof temporary weakness.iii)
To achieve or maintain a target capital structure:
The buy backs provide flexibility tocorporate entities to alter their capital structure and financial position. Buy-backs aid acompany in achieving an optimum debt equity ratio, especially when its equity isproportionately large.
To prevent hostile take over bids:
The buy back will lead to a decline in liquidity andincrease in share prices, which will make a take over operation difficult. The impact of buy-back in eliminating surplus cash makes companies less succeptible to hostile take overs.
A company is allowed to buy back subject to following conditions.
For completed assignment visitwww.studenthelp.tkQ.3. Select a company and identify the reasons for price fluctuations in the past oneyear.CAUSES OF PRICE FLUCTUATIONS